Relativity Squares Off With Netflix Over Feasibility of Bankruptcy Exit

Kevin Spacey makes cameo at reorganization plan confirmation hearing.
Ryan Kavanaugh

On Monday, Relativity chief Ryan Kavanaugh arrived at a moment that’s been months in the making, ever since his Wall Street-backed studio was thrown into Chapter 11 bankruptcy upon maturing debt.

U.S. Bankruptcy Judge Michael Wiles presided over a hearing to determine whether to confirm a reorganization plan for the embattled studio. At the New York courthouse, the judge heard about new deals, saw a video presentation featuring actor Kevin Spacey and witnessed the debtor-battling Netflix over the feasibility of the plan.

With hundreds of millions of dollars in debt, the studio that once co-financed such films as Fast & Furious 6, Bridesmaids, Salt and The Social Network, before taking an analytic approach towards producing its own mid-budget films including Immortals and Limitless, filed its bankruptcy petition last July.

Since then, Relativity sold off its profitable television division responsible for MTV’s Catfish and CBS’ Limitless to some of its leading creditors for $125 million in canceled debt and other financial considerations. The studio also came to complicated settlements with other lenders including Cortland, RKA, Manchester and Macquarie and put forward a reorganization plan that envisions releasing 22 films by 2018. That year, the studio projects $821.8 million in revenue and about $162 million in profit.

Relativity also is primed to have Spacey and his producing partner, Dana Brunetti, run the company after emerging from bankruptcy. On Saturday, Brunetti delivered a declaration that stated both would have greenlight authority on the production of new films.

More than 85 percent of unsecured creditors voted to accept the plan, but there are holdouts including Netflix, responsible for hundreds of millions in licensing revenue to Relativity. The streaming giant is upset that Relativity hasn’t been able to make delivery of a promised number of films.

Netflix's lawyer Scott McNutt begged for a few more days to address concerns. He noted there has been late news of changes in management, ownership and financing: "Take Spacey and Brunetti. What's their role? It's great they want to run a studio, but there are fundamental questions. Are they putting money into it? Will they be owners? Employees?"

At the hearing, Judge Wiles slammed McNutt for a lack of "preparedness" and wondered why he didn't ask for discovery earlier.

And so, the judge allowed the contested hearing to proceed, letting a financial expert, Matthew Niemann of Houlikhan Lokey and one of Relativity's new financial saviors Joseph Nicholas, give testimony about the details of the plan. Niemann told the judge that Relativity would have $20 million in cash on hand after a bankruptcy exit and has reduced its debt by $630 million over the last few months. On the other hand, he struggled to answer the judge's question about how the debtor could project financial results years hence with so much certainty. ("It's literally math," was the beginning to a convoluted answer.) Netflix could get an opportunity for cross-examination later this afternoon or tomorrow morning. A decision on confirmation won't happen until then.

Working to clear hurdles, Relativity has in the last few days worked out a deal with CIT Bank, the production lender of forthcoming Relativity films Kidnap and Disappointment Rooms, by giving it first-priority lien status on certain income, but it also revealed in court today it is still finalizing a deal on its P&A Ultimates facility. What's more, the reorganization plan calls for $100 million more in investment to be raised in next two years.

Earlier at the hearing, and perhaps for the first time in bankruptcy history, movie trailers were shown in bankruptcy court. Spacey delivered a taped message to the judge, touting his SAG Award, and introducing previews of Kidnap and Masterminds, which Relativity hopes to release after coming to deals with Carat and other P&A lenders. The video presentation ended with the judge being shown Spacey's speech Saturday night at the SAG Awards, where the actor and potential Relativity chairman said he was on an elevator "going up."

Relativity's attorney Bennett Spiegel called the Spacey-Brunetti appointments a "critically important addition," a "game-changer," and said it will improve the quality of projects from the studio. This is a "unique case," he said, adding that Relativity entered bankruptcy in "fundamentally bad shape, out of funds" and that in the process, "there has been a litigation bonanza. It's rewarding because there has been something to fight over."